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Can Bangladesh do without Foreign Aid?

Fahmida KhatunExecutive Director

Centre for Policy Dialogue (CPD) 8 November 2018

Acknowledgement

• This study has been carried out by Dr Fahmida Khatun, Executive

Director, CPD; Mr Syed Yusuf Saadat, Research Associate, CPD and Mr

Md Kamruzzaman, Research Associate, CPD;

• Research assistance has been provided by Ms Shamila Neemat

Sarwar, Programme Associate, CPD and Mr Fahmid Chowdhury,

Intern, CPD.

• The study team would like to express their sincere gratitude to Dr

Debapriya Bhattacharya, Distinguished Fellow, CPD; Professor

Mustafizur Rahman, Distinguished Fellow, CPD; Dr Khondaker Golam

Moazzem, Research Director, CPD and Mr Towfiqul Islam Khan, Senior

Research Fellow, CPD for their valuable comments.

2

Contents

1. Background

2. Objectives of the study

3. Methodology of the study

4. Overview of Aid Dynamics in Bangladesh: Recent Trends

5. Evaluation of Effectiveness for Foreign Aid

6. Macro Level Analysis: Contribution of Foreign Aid to Growth

7. Micro Level Analysis: Contribution of ODA to Health Outcomes

8. Summary of Findings: Macro and Micro Level Analyses

9. Challenges of Aid Utilisation in Bangladesh

10. Recommendations

3

1. Background

1. Background

• Bangladesh is passing through the period of double graduation. In 2015, the country hasachieved the status of Lower Middle Income Economy (LMIE) by increasing its per capitaincome. In March 2018, it has entered into the process of graduating from a Least DevelopedCountry (LDC) to a developing country by 2024 (UNCTAD, 2017) by fulfilling all threecriteria to be eligible for graduation - per capita income, human assets, and economicvulnerability.

• However, Bangladesh needs to deal with several challenges as it moves forward to make itsgrowth sustainable. One such challenge will be mobilisation of finance for development(FfD) from external sources.

• Once graduated, terms of official development assistance (ODA) (foreign aid) will changeand external resources will be costly as the grant element mat not be widely available. Thismay potentially put pressure on debt servicing.

• Though the share of ODA, as percentage of GDP has declined to 1.47 percent in FY2016-17,compared to 3.07 percent in FY1996-97, the need for ODA in development activities ofBangladesh is still significant.

• The need for ODA will be felt more as the government of Bangladesh (GoB) is committed toimplement the Sustainable Development Goals(SDGs).

• Thus, raising the efficacy of aid utilization will become more important in the coming days.

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1. Background

• While there is a higher demand for more resources fromthe international sources, a paradoxical situation isobserved. A large amount of foreign aid remains in thepipeline indicating that new funds do not necessarilyguarantee their timely and full utilisation. This hasimplications for development initiatives.

• The challenges related to foreign aid regime inBangladesh are twofold: (i) efficient disbursement, and(ii) efficient utilisation.

• This emphasizes the need for improving the governanceof aid utilisation.

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2. Objectives of the Study

2. Objectives of the study

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Evaluate the effectiveness of ODA

Assess the contribution of foreign aid at macro and micro levels

3. Methodology of the Study

3. Methodology of the Study

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Secondary researchSurvey of literature to draw narratives on foreign aid effectiveness

Empirical analysis to understand the effectiveness of foreign aid at macro and micro levels

Interview of knowledgeable informants to solicit their

views on how aid utilisationcan be made effective

4. Overview of Aid Dynamics in Bangladesh: Recent Trends

4. Overview of aid dynamics in Bangladesh: Historical trend of aid

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Source: Economic Relations Division (ERD), Ministry of Finance, Government of Bangladesh.

Figure 1: Share of ODAShare of ODA in the economy is declining

• Though the volume of ODA is increasing, ODA as a share of GDP has been declining steadily

• This indicates that the country’s dependence on ODA has also declined

• In contrast, exports and remittances (as % of GDP) have increased significantly since the 1980s

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Export (as % of GDP) Remittance (as % of GDP)

ODA (as % of GDP) FDI (as % of GDP)

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Total Aid Food Aid as % of Total Aid

Commodity Aid as % of Total Aid Project Aid as % of Total Aid

4. Overview of aid dynamics in Bangladesh: Composition

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Figure 2: Food, Commodity, and Project AidProject aid comprises of 100% of total aid.

• Project aid as a share of total aid has been increasing since FY99

• Commodity aid as a share of total aid has been close to zero since FY04

• Food aid as a share of total aid has been decreasing since FY06

4. Overview of aid dynamics in Bangladesh: Bilateral and multilateral aid

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Figure 3: Bilateral and Multilateral Aid Disbursement (USD Million) Gap between bilateral and multilateral aid

• Bilateral aid as a share of total aid has been decreasing since FY04

• Multilateral aid as a share of total aid has been increasing since FY04

• Gap between the two closed down in FY14, but has been increasing since then

4. Overview of aid dynamics in Bangladesh: Aid disbursement in selected sectors

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Agriculture (% of ODA)Health, Population & Family Welfare (% of ODA)Power (% of ODA)

Figure 4: Aid Disbursement in selected Sectors (% of Total ODA)Aid disbursement in infrastructure overtakes that of social sectors

• Aid disbursement in power sector rose sharply since FY10

• Aid disbursement in transport sector exceeded that of education in FY17

• Aid disbursement in agriculture has been hovering at around 5%

4. Overview of aid dynamics in Bangladesh: Utilisationof project aid and Taka Allocation

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Figure 5: ADP Utilisation (in %)Gap in utilisationbetween Taka allocation and project aid allocation in ADP

• Utilisation of Takaallocation of ADP showsincreasing trend since FY08

• Utilisation of project aidallocation has been below80% from FY06 onwards 0

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5. Evaluation of Effectiveness of Foreign Aid

5. Evaluation of effectiveness of ODA: Methodology

Assessing aid effectiveness by looking at:

• ODA funds trajectory – additionality, predictability, grants vs loans

• Ownership – relevance to domestic policies, national level coordination, sustainability

• Alignment - with partners’ development strategies, use of country system, untied aid, demand-supply gap

• Donor coordination

• Absorptive capacity

• Macro level contribution: economic growth

• Micro level contribution: ODA funds for the health sector

18

5. Evaluation of effectiveness of ODA: ODA Fund Trajectory

ODA Fund Trajectory

• Additionality: Whether volume and growth of ODA are increasing or not

• Predictability: Commitment vs. disbursement of ODA

• Grants vs. loans: Changes in composition of grant and loan components over time

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5.1 Additionality of aid

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Figure 6: ODA in Bangladesh as % of GDP and ADP (USD Million)Aid shows declining trends with respect to GDP and ADP

• ODA as a share of ADP has been decreasing since FY08

• ODA as a share of GDP has been generally decreasing since FY96

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5.2 Predictability: Commitment and disbursement

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Figure 7: Aid Commitment and Disbursement Commitment-disbursement gap increasing

• Commitment spiked inFY11 and increaseddrastically in FY17

• Disbursements have beenincreasing steadily sinceFY11

• Unusually large differencebetween commitment anddisbursement in FY17, dueto high commitment andlow disbursement

5.3 Grants vs loans: Changes in composition ofgrant and loan components over time

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Figure 8: Grants and Loans Disbursement (USD Million) Loans increasing amidst dwindling grants

• In FY97, loans and grants werealmost equally divided asshares of total aid

• Since then, grants as a share oftotal aid have been declining,while loans as a share of totalaid have been rising

• In FY17, loans were 87.5% oftotal aid, whereas grants wereonly 12.5%

5.4 External Debt to GDP ratio

Source: Economic Relations Division (ERD), Ministry of Finance, Government of Bangladesh.Note: (i) The base year for 2000-2012 is 1995-96; (ii) The base year for 2012-2017 is 2005-06.

External Debt as a Percentage of GDP

23

External Debt as a percentage of GDP is declining

• External debt as a percentage of GDP has been declining from FY01 to FY17, with the exception of FY02

• It reached its lowest point in FY17 (12.8%)

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5.4 Debt Servicing to GDP ratio


Debt Service as a Percentage of GDPDebt servicing as a percentage of GDP is declining

• Debt-servicing as a percentage of GDP has also been declining consistently since FY00, reaching its lowest in FY17

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5. 5 Summary: Evaluation of ODA in Bangladesh

ODA exhibits Based on data and documents Stakeholders’ view

Additionality Mixed Mixed

PredictabilityMixed

Mixed. Change in the priority

of donor countries and

delayed implementation of

projects are factors behind

unpredictability

Grants vs. LoansShare of grant in ODA is declining fast and

the major part of aid comes as loans

Infrastructure projects

should be in grant form

Source: Authors’ elaboration

25

5. 5 Summary: Evaluation of ODA in Bangladesh (contd.)

Source: Authors

Indicator ODA exhibitsBased on data and

documentsStakeholders’ view

OwnershipRelevance to

domestic policies

Major ODA funded

projects meet many

national objectives

ODA funded projects have

relevance to Bangladesh as it aims

to achieve economic and social

progress

National level

coordination and

stakeholder

involvement

There is an institutional

mechanism for ODA

project coordination

However, national level

coordination of projects is weak.

The scope for involvement of

broader stakeholders besides the

government and donors is limited

Sustainability

GoB has exhibited the

capacity to shoulder a

large share of the cost of

donor supported

investment projects

Partial

26

Indicator ODA exhibitsBased on data and


AlignmentAlignment with

partners’

development

strategies

In the case of ODA, 100

percent of aid flows to

Bangladesh were aligned

with national priorities by

2010

The flow of ODA in Bangladesh is

aligned with national priorities,

Use of country

systemSome improvement

GoB officials believe that the capacity

building support by donors is now

better coordinated and consistent with

national and sectoral priorities

Untied aid

Some improvement in terms

of aid being untied (in cases

of traditional sources)

Donors continue to impose too many

conditions

Demand-supply

gap

Resource gap for health,

education, gender

empowerment, climate

change and infrastructure

are huge compared to the

flow of aid

ODA projects should be more demand

driven There is also need for more

donor support for improving physical

infrastructure

Source: Authors


27

Source: Authors

Indicators ODA exhibitsBased on data and


Donor

coordination

Donor

coordination

Coordination among

donors has improved

through local consultative

groups and joint

cooperation strategy

Some improvement in the area of

donor coordination. Donors also

prefer to coordinate various

activities among themselves, but

sometimes bypassing the

government

Absorptive

capacity

Absorptive

capacity

Low absorption capacity

due to lower

implementation of foreign

aid funded development

projects

Lack of efficient administrative

mechanism, low human capacity,

political instability and stringent

donor requirements are major

reasons for low absorption capacity


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6. Macro Level Analysis: Contribution of ODA to Growth

6.1 Variables

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Variable DefinitionGDP per capita Annual percentage growth rate of GDP per capita based constant 2010 U.S. dollars. Investment Annual growth rate of gross capital formation based on constant 2010 U.S. dollars.Labour Growth rate of labour force (people ages 15 and older who supply labour for the

production of goods and services during a specified period) Aid Net official development assistance received as a percentage of Gross National IncomeAid squared Squared aid termBroad money supply Broad money supply as a percentage of GDPPolicy index Policy index (composed of inflation, govcons, and trade)Institutional quality

index

Institutional quality index (composed on coc, ge, ps, rq, va, and rol)

Inflation Logarithm of inflation rate plus one Government

consumption

Government consumption relative to GDP

Trade Exports plus imports relative to GDPControl over corruption Control over corruption indexGovernment

effectiveness

Government effectiveness index

Political stability Political stability indexRegulatory quality Regulatory quality indexVoice and accountability Voice and accountability indexRule of law Rule of law index

Source: Author’s compilation based on data from World Development Indicators and Worldwide Governance Indicators

6.2 Index constructions

Policy index

Step 1:

• Regress GDP per capita on inflation, government consumption, and trade

Step 2:

• Use the estimated coefficients as weights to make a composite policy index

Institutional quality index

Step 1:

• Regress GDP per capita on control over corruption, government effectiveness, political stability, regulatory quality, voice and accountability, and rule of law

Step 2:

• Use the estimated coefficients as weights to make a composite institutional quality index

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6.3 Results from Granger causality test

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Model Log-Linear(i) Log-Log(ii)

Null Hypothesis F Statistic(Probability)

F Statistic(Probability)

Aid does not Granger Cause GDP per capita

0.55255(0.5875)

0.58541 (0.5699)

Aid squared does not Granger Cause GDP per capita

0.50202(0.6158)

0.58541(0.5699)

Source: Author’s calculationsNote: (i) GDP per capita is in natural logarithm, all other variables are in level; (ii) all

variables are in natural logarithm; (iii) optimal lag length selection is based on theSchwarz Information Criterion (SIC); (iv) probability values inparentheses.

Aid does not Granger cause growth

• the probability of the nullhypothesis that ‘aid doesnot Granger cause GDP percapita’ being true is 0.5875for the log-linear model and0.5699 for the log-logmodel

• we cannot reject the nullhypothesis that ‘aid doesnot Granger cause GDP percapita’

6.4 Results of model estimation

33

Model Log-Linear(i) Log-Log(ii)

Variable GDP per capita GDP per capitaAid 1.036575

(1.000280)-42221.94(44902.14)

Aid squared -0.372411(0.338919)

21110.94(22451.14)

Investment 0.003814(0.011563)

0.044675(0.203643)

Labour 0.270173**(0.086084)

0.847644**(0.278772)

Broad money supply 0.026765**(0.007597)

1.309213***(0.230249)

Institutional quality index

0.038833(0.044616)

0.476411(0.406648)

Policy index 0.307189*(0.110836)

0.403272*(0.202937)

Constant 3.403410**(0.963096)

-

R squared 0.982052 0.886795Adjusted R squared 0.932697 0.773591

Source: Author’s calculationsNote: (i) Dependent variable is in natural logarithm, all other variables are in level and level trend specification assumed; (ii) all variables are in natural logarithm and no trend

specification assumed; (iii) aid and aid squared are cointegrating regressors; (iv) automatic lead and lag specification based on Akaike information criterion, Schwarz informationcriterion, and Hannan–Quinn information criterion; (v) standard errors in parentheses; (vi) *, **and *** denote statistical significance at 1%, 5% and 10% levels respectively.

Aid is not a significant determinant of economic growth for Bangladesh

• the coefficients for aid and aid squared are both statistically insignificant

• the coefficients for labour supply, broad money supply, and the policy index are positive and statistically significant

• the goodness of fit for the log-linear model is higher compared to the log-log model

7. Micro Level Analysis: Contribution of ODA to Health Outcome

7.1 Sectoral aid as a share of sectoralexpenditure

FY

Education project aid as share of total education

expenditure (in %)

Health project aid as share of total health expenditure

(in %)2005-06 24.1 41.8

2006-07 25.1 43.2

2007-08 13.7 31.9

2008-09 24.3 37.3

2009-10 11.1 19.7

2010-11 9.3 22.1

2011-12 11.6 29.0

2012-13 15.7 21.0

2013-14 10.3 20.6

2014-15 9.6 13.2

2015-16 9.3 12.8

2016-17 7.6 30.2

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7.2 Variables

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Variable DefinitionInfant Mortality Rate Infant Mortality Rate (IMR) The number of deaths occurring during a given year among

the live-born infants who have not reached their first birthday, divided by the number of

live births in the given year and usually expressed per 1000 live births.Under-Five Mortality

Rate

Under-Five Mortality Rate (U5MR) The under-five mortality rate is defined as the number

of deaths to children under five year of age per 1000 live births in a given year.Child Death Rate Child Death Rate (ChDR) Child death rates is defined as the number of deaths among

children in age 1-4 per 1000 mid-year population in the same age group.Project Aid in Health

Sector

Disbursement of project aid in health sector (million USD)

Per Capita Health Aid Current external expenditures on health per capita expressed in international dollars at

purchasing power parity (PPP).Per Capita Government

Health Expenditure

Public expenditure on health from domestic sources per capita expressed in international

dollars at purchasing power parity (PPP).Per Capita Private

Health Expenditure

Current private expenditures on health per capita expressed in international dollars at

purchasing power parity (PPP).Per Capita Out-of-pocket

Health Expenditure

Health expenditure through out-of-pocket payments per capita in international dollars at

purchasing power parity (PPP).

Source: Author’s compilation based on data from World Bank’s Health Nutrition and Population Statistics database and Sample Vital Registration Statistics of Bangladesh Bureau of Statistics (BBS).

7.3 Results of model estimation

37

Model Log-Log(i) Log-Log(i) Log-Log(i)

Variable Infant Mortality Rate

Under-Five Mortality Rate

Child Death Rate

Project Aid in Health

Sector

-0.080906** (0.005299)

-0.127899** (0.010459)

-0.132605** (0.039631)

Per Capita Health Aid -0.288816** (0.019316)

-0.263639*(0.038121)

-0.112739 (0.085884)

Per Capita Government

Health Expenditure

-0.134111* (0.012634)

-0.377323** (0.024935)

0.060295 (0.084468)

Per Capita Private Health

Expenditure

1.521650 (0.374045)

-7.105054* (0.738202)

6.870401 (3.457137)

Per Capita Out-of-pocket

Health Expenditure

-1.601359 (0.393535)

6.911961 (0.776667)

-9.230460* (3.523743)

Constant 2.250152*** (0.011464)

3.059968*** (0.022625)

1.630999 (0.145183)

Trend 0.129262**(0.027176)

Trend squared -0.001063**(0.000309)

R squared 0.999983 0.999957 0.997511Adjusted R squared 0.999796 0.999489 0.993032

Source: Author’s calculationsNote: (i) All variables are in natural logarithm; (ii) project aid in health sector and per capita health aid are cointegrating regressors; (iii) automatic lead and lag specification based on

Akaike information criterion, Schwarz information criterion, and Hannan–Quinn information criterion; (iv) standard errors in parentheses; (v) *, **and *** denote statisticalsignificance at 1%, 5% and 10% levels respectively.

Health aid is a significant determinant of health outcomes for Bangladesh. • the coefficients for project

aid in health sector and per capita aid in health sector are both negative and statistically significant

• this implies that aid in the health sector has a significant impact in reducing infant mortality rate, under five mortality rate and child death rate

8. Summary of findings: Macro and Micro Level Analyses

8. Summary of findings: Macro and Micro Level Impact

Source: Authors

Impact Based on data Stakeholders’ view

Macro levelNo significant impact

on economic growth

Impact of ODA on the growth is

minimal because Bangladesh’s

dependency on ODA has

declined

Micro level

Health sector projects

have benefitted from

ODA support

ODA in strategic areas is critical

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9. Challenges of Aid Utilisationin Bangladesh

9. Challenges of Aid Utilisation in Bangladesh

• During the period of the Millennium Development Goals(MDGs), the GoB managed to receive external support toimplement the MDGs successfully. For example, compared to2000, the flow of external resources increased by 1.9 times in2015 (MoF, 2017a).

• However, aid is still not fully utilised in Bangladesh. Accordingto the Aid Management Unit (AMU) under the ERD, aideffectiveness in Bangladesh is performing less than itspotential due to a number of interlinked and interdependentstructural, procedural and capacity problems (ERD, 2011).

• Major reasons for low ADP implementation includeinstitutional weakness, delayed implementation, and costoverrun (CPD, 2010; 2018b).

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9. Challenges of Aid Utilisation in Bangladesh (contd .)

• Procedural lapses of a project, incomplete proposal,illogical expenditure target, and inadequate feasibilitystudy hinder implementation of ADP.

• Due to procedural delays in land acquisition andprocurement after approval, often projects cannot take-off in a timely manner. By the time the project activitystart, spending the total allocation for the fiscal yearbecomes difficult.

• In terms of ADP implementation, the following obstacleswere identified: (i) recruitment of project director andacquisition of land; (ii); recruitment of consultant/firm;(iii) preparation of work plan; (iv) recruitment of humanresources (IMED, 2017).

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10. Recommendations

10. Recommendations

Improvements are needed in a number of areas:

• Project design, implementation and management

• Bureaucracy among donors and GoB

• Conditionalities

• Alignment

• Capacity development

• Country systems

• Monitoring and evaluation

• Transparency and accountability

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Thank you

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